issuers

A way to end the auction rates securities mess?

Mon, 05 May 2008 06:59:56 -0400

It's so easy to forget about the auction rate securities mess. But the fact remains that more than $300 billion remains tied up in this near-frozen market. Issuers, lots of municipalities and nonprofits cannot forget about any of this. A New York Times column notes that Wall Street firms have a lot of conflict in this market. They rake in management fees, even when rate-setting auctions fail (as they have done lately). They collect fees when issuers redeem the securities and unwind the related derivatives. One answer would be to sell some of this paper at a discount via a nascent secondary market. But Wall Street firms, the Times says, are still asking issuers to redeem at par. Anything less could stick the issuer and the underwriter in arbitration.

For more:
- here's the New York Times article

Can everyone be wrong?

Wed, 23 Apr 2008 06:59:59 -0400

Back when the subprime crisis had not fully bloomed, there were a few brave souls who were convinced--absolutely!--that the mortgage edice was about to crash. You can imagine the pitch meetings. They were likely derided as delusional. You can almost hear the argument: "So you mean to tell us that everyone is wrong? That this entire industry built up by the likes of Merrill Lynch and Lehman Brothers and Bear Stearns is all a house of cards?"

We all know the rest of the story. Now we see something else at work: the entire buyside seems to be rushing into distressed credit. Every brand name private equity firm is busy launching distressed credit funds. Hedge fund are even angling in. So is the herd headed toward a cliff again? Maybe, maybe not. Consider leveraged loans. Banks pretty much had to offload them for balance sheet purposes. But are any issuers set to default? Not likely. Some leveraged-up firms may suffer to be sure, but it's more likely that most will find a way.

Then again, we've heard that before.

- Jim

European banks bent on more capital

Wed, 23 Apr 2008 06:59:54 -0400

Now this is eye popping: Royal Bank of Scotland has announced a $24 billion sale of stock, the biggest offering in British corporate history, according to the AP. The new capital is sorely needed to provide a cushion in the wake of extensive mortgage-related losses. The bank has said it will write down close to $12 billion. Ouch! Other British banks will do the same, joining their American brethren, notably Citigroup, Merrill Lynch and JP Morgan Chase. But $24 billion? This will be seen a humiliation by many, especially after its historic purchase of ABN last year. The terms on the RBS deal will be interesting. Lots of preferred shares issuers have been offering souped-up yields, ensuring not shortage of buyers.

For more:
- here's the AP article

Can Egan-Jones make a difference?

Wed, 27 Feb 2008 06:59:56 -0500

The Securities and Exchange Commission has granted Haverford, PA-based Egan-Jones, status as a nationally recognized statistical rating organization (NRSRO). This basically means that it now is a credit rating agency on par with Moody's and Standard & Poor's. The firm comes to the table with a twist: Its business model is strikingly different in that it relies on an investor-paid approach, not an issuer-paid one, notes Investment Dealers' Digest. This addresses what many see as a huge flaw in the current system, the overt conflict of interest when issuers pay for their own ratings. We'll see if Egan-Jones can make a splash.

For more:
- Here's the Investment Dealers' Digest article

Related article:
Questions about upstart credit rating agency. Article

Some radical ideas for credit rating agency reform

Wed, 13 Feb 2008 06:59:57 -0500

Moody's, Standard & Poor's and Fitch are all bent on showing the world that they are serious about reforms. Critics, of course, are unfazed by their steps so far. To them, none seem to be addressing the most obvious flaw in the system: the conflict of interest. Companies pay for ratings on their own bonds. There's always a huge incentive to please your customers. The Financial Times floats some ideas. One idea would be for issuers to pay into an independently managed pool, which would then assign a rating agency, thus breaking the commercial incentive to rate bonds high. Another idea would be for investors to pay for ratings. Interesting.

For more:
- here's the Financial Times article

More on credit rating agencies

Fri, 17 Aug 2007 06:59:55 -0400

Looks like Moody's, Standard & Poor's and Fitch are in for some more bad press. These hugely profitable companies--and make no mistake they are out to make a buck--suffer in part from a lack of public knowledge about what exactly they do. The process by which they assign ratings is something of a black box, and right now, it is easy to bash them for their cozy relationships with issuers, It's a bit like regulatory bodies and industries. At some point, the regulator is co-opted. Few would be surprised if a lot of agency employees were angling to get hired by the big issuers, where the money is better. Next month's house hearing should be interesting. Reform is in the air, especially in Europe. For all the controversy, you have to wonder if breaking the cartel will really help. It might just give the issuers more options to find someone they can "work with."

For more bad press:
- this lengthy Portfolio.com article is a good example

Credit rating agencies still in harsh spotlight

Thu, 16 Aug 2007 06:59:58 -0400

It's getting a tad uncomfortable for the credit rating agencies. People are wondering about their role in the global financial meltdown we're now suffering. The House Financial Services Committee will hold hearings next month. And the EU has opened a probe of the agencies and their response to the credit meltdown. The agencies exist to assess the credit worthiness of debt and--and this is a small thing--the credit-worthiness of debt-related instruments. That has been an area of growth for the agencies, powering their growth to whole new levels. Their ratings do not attempt to grade their stability or investment value. Still, people are wondering about their relationships with issuers and whether their opinions on various CDOs somehow played a role in the meltdown. The Ohio AG is looking into this. One could argue that buyers should take a closer look under the covers of these instruments. Apparently, some institutions have standing orders with traders to buy anything rated A or higher. I'll have a bit more tomorrow.

For more:
- here's a Financial Times article

Perspective: Financial alchemy at its best and worst

Fri, 10 Aug 2007 06:59:58 -0400

At the heart of this credit mess we're slogging through is the art of securitization. For the most part, this art has been well practiced, creating all sorts of ways for risk to be offloaded and thus for liquidity to be expanded. Many people benefited. But at some point, it can easily become something of a dark art. The broad movement to turn collections of low-rated debts into highly rated vehicles in some way has been ingenious, allowing banks and issuers to offload stuff that would have been much harder to sell. It all came down to the credit rating. As long as the CDO or other vehicle had enough A's in its rating, there was a huge market (apparently overseas institutions). But then the underlying securities took a massive hit and people are wondering what effect that will have on the packages they own. You have to think that the CDOs might be downgraded at some point. So far, they seem to be performing. But everyone knows that a wave of defaults could cascade to even the highly rated tranches. (Right now, ratings don't mean much.) And fear is a prime mover on Wall Street.

For a historical perspective:
- here's a New York Times article

Big test for private equity firms coming

Mon, 25 Jun 2007 20:01:37 -0400

Are bond investors about to throw water on the private equity parade? We'll see. This week, Cerberus Capital Management will start its road show for $62 billion in bonds to support the $7.4 billion buyout of Chrysler. First Data, owned by Kohlberg Kravis Roberts, will be selling bonds next month. TXU will try to sell about $24 billion in bonds at some point this year. With rates poised to climb, some institutions seem to be developing cold feet. The New York Times notes that buyers have forced issuers such as Thomson Learning and U.S. Foodservice to lower their expectations. We've spoken about the effect of rates on the industry. A rate spike would certainly be a major thorn to deal with. Banks are also in a mood to no longer accept the lenient financing terms. A shift, long discussed, may already be underway.

For more:
- here's the NYT article

Foreign IPOs on the rise

Mon, 09 Apr 2007 20:01:34 -0400

Sarbanes Oxley was said to be a huge downer for the U.S. capital markets, especially the initial public offering market. People watched with dismay as companies seemed to opt for London and Asia. But that may have been a bit overblown. There were certainly other issues, notable fees. In any case, there are signs that foreign company IPOs are on the rise. So far this year, about 20 percent of all deals have been from foreign issuers, compared with about 16 percent a year ago. TheStreet.com notes that the pace of foreign offerings may well lead to a record year. Last year, foreign companies accounted for nearly one-quarter of proceeds in 2006, the highest since 1994. So all the fear may have been overblown. The real advantage to me seems to be the deeper and more forgiving after-market. AIM companies can easily end up with issuer's remorse.

For more:
- here's the article from TheStreet.com
- subscribe to FierceSarbox